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Oliver L. Campbell:
Petroleos de Venezuela (PDVSA) 2005 financial results
VHeadline.com oil industry commentarist Oliver Campbell writes:
PDVSA's financial results for 2005 were approved at the Annual General Meeting on October 3, 2006, less than four months after those of 2004 were approved on June 20, 2006. Producing the accounts nine months after the year end is nothing to be proud of, but it shows the accountants are finally catching up.
It is hoped in future they can present the accounts by March 31 which is the date the "Old PDVSA" always achieved.
- I have made a brief comparison of the results between 2005 and 2004 and, on this occasion, I have also included the figures for 2003 to show that sales, net of oil purchases, have doubled and government take has almost tripled in the three years.
Presentation of the Statement of Net Income varies from the traditional layout because I believe it is more informative. It shows that, in a state company, all the difference between income and costs accrues to the government -- the net income can be taken as dividends. The royalty and income tax rates can be changed, but this only rearranges the individual amounts of royalty, income tax and net income -- the total remains the same.
In 2005, export sales less oil purchases increased 32% when compared with 2004. This reflects a small increase in volume and a large jump in the average oil price. Compared with 2003, the amount more than doubled.
- Costs and expenses in 2005, excluding royalty, went up by almost 8%. But between 2003 and 2005, the increase was more than 40% and the Oil Minister has made no comment on this.
The increase of 44% in royalty is due to 4% higher production coupled with the hike of 40% in the per barrel value of oil.
But the great impact comes from income before royalty, social development and income tax which increased by an extraordinary 52%, almost triple the amount in 2003. Since these figures also represent the amount accruing to the state, the government will congratulate itself on the excellent financial results for 2005.
Social development refers to payments made for various "missions" or social projects which would normally be carried out by government departments utilizing funds allocated to them in the National Budget. That PDVSA should fund such social projects directly is a departure from the normal practice.
One item I do not understand is the income tax provision...
Normally income tax as a percentage of income before tax is fairly constant. However, the percentages in 2003, 2004 and 2005 were 29%, 50% and 47% respectively. Venezuela, as with many tax regimes, does not allow expenses which are not necessary to produce income (except for a small amount to cover donations) to be deducted for tax purposes. As the contributions for social development fall into this category, I should have expected a higher rate than 47% in 2005. Also I do not see why the rate in 2003 was so low.
The national oil production figures in 2005 show in increase of 4%. Some commentators question the validity of these figures and maintain the true production figures are lower.
After the strike which affected PDVSA's activity in 2003, investment in 2004 returned to normality. The 2005 figure is some 30% higher but, even so, it represents only 66% of the budgeted expenditure of $5,869 million. Perhaps the company should bear in mind Hofstadter's Law that "It always takes longer than you expect" and budget more conservatively.
Long term accounts receivable are starting to grow because of more credit sales on easy terms to various countries. This is part of the government's policy and, in the longer run, it will have a negative effect on PDVSA's cash flow.
The long term debt shown at end 2005 has been drastically reduced in 2006 with the early redemption of bonds issued in US$. The principal object was to eliminate the need to send information to the Securities and Exchange Commission of the USA.
Readers can skip this paragraph as it will only interest those who follow PDVSA's accounts assiduously.
The 2004 results were approved on June 20, 2006 and the 2005 results on October 3, 2006. But in less than four months the 2004 accounts were "restructured" to take account of an international accounting standard that affects inventories. What I do not understand is why the external auditors did not make the change for the June 20 meeting to approve the 2004 accounts.
The accounting changes increase the 2004 net income by $437 million and the following are the items amended:
It is hoped PDVSA will promptly publish the notes which form an integral part of the 2005 accounts. They will add a little to what the president of PDVSA, the Oil Minister with his other hat on, told us in his message to shareholders.
However, what Venezuelan citizens, who are the true shareholders of PDVSA, really need is the publication of the "Annual Report" for 2005. The last one to be published was in respect of 2001.
The Oil Minister accused the "Old PDVSA" of being a "black box," but he can hardly claim the "New PDVSA" is different if he does nothing about it.
Oliver L Campbell
oliver@lbcampbell.com
 Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Campbell returns frequently to Venezuela and maintains an active interest in political affairs: "I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill ... the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians."
COMMENTS: Please check these posts which were made by me during the past week. PDVSA may hit the US$100 billion record by the end of this year. There is no doubt that it is Latin America's leader. You may check these posts and read what other members of the forum had to say about the Venezuelan giant oil company:
http://forum.atimes.com/topic.asp?TOPIC_ID=8768
http://forum.atimes.com/topic.asp?TOPIC_ID=9131
http://forum.atimes.com/topic.asp?TOPIC_ID=9140
http://www.pdvsa.com/interface.sp/database/fichero/publicacion/1442/65.PDF
Text by Armando Rozário for www.jornalorebate.com and for publication in Macaé Jornal next week.
Macaé, 31st. of October, 2006.
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